Introduction

This week; a handful of earnings and a few economic reports. Next week nearly 20% of the S&P 500 reports earnings amid a flurry of important economic data. This is the calm before the storm. Even more so considering that earnings will be coming in hot for the next 3 to 4 weeks at least, and that the election and next FOMC meeting are only a month or so away as well. Most of today's talk not focused on earnings was centered around last nights presidential debate; Trump is an ass, Hillary a self-serving two-faced liar, they both suck chose your poison.

There was only 1 earnings report today, a small regional bank in Mississippi called First Bancshares which increased quarterly earnings by 22% but still failed to meet market expectations. There were no economic reports and none scheduled for Tomorrow, the only one of real importance Wednesday is the FOMC minutes. Thursday is weekly jobless claims and then Friday we'll some more substantial reporting; PPI, retail sales, business inventories and Michigan Sentiment.

Asian markets were mixed today but two, Hong Kong and Japan, were closed for holiday. European markets were open for business, rising about 1% on average and driven by rising oil prices.

Market Statistics

Futures indicated a positive open all morning although early indications were little more than hovering above break even. Later in the pre-opening session futures began to rise, indicating an open about a half percent above last week's close, and this held into the opening bell. The market opened with small gains, well within recent trading ranges, and moved slightly higher throughout the morning. The high was hit shortly before 10AM, about +1% for the SPX, and that was not broken the rest of the day. From that point on the market drift to the side and slightly lower, trading about a half percent above Friday's close, and held those levels into mid afternoon. Late day trading was more of the same, sideways drift that left the indices hanging around the +0.5% mark.

Economic Calendar

The Economy

No data today but still the Moody's Survey of Business Confidence release at 10AM. The index gained 0.2% to hit 25.2% and is holding steady at these levels. This is the 11th week the survey has been at or near this level since hitting bottom 3 months ago. Mr. Zandi says that business sentiment has held up rather well over the summer considering the series of global shocks the market sustained; the index shows a global economy expanding at a rate near its potential. Sentiment in the US is best, South America the worst although global sentiment appears to be catching up with the US. Businesses are cautious in the present but more optimistic and upbeat out to early next year.


Earnings season really gets started this week although there are only a few reports of importance on the schedule. Tomorrow kicks things off with Alcoa, after the bell, with a handful of the Big Banks scheduled for later this week. According to Factset the blended rate of earnings going into this week, for the 3rd quarter, is -2.1%, steady from last week. If the trend of all-index earnings beating expectations by roughly 4% holds true this may rise as high as +2% by the end of the cycle. If that happens full year 2016 earnings blended rate will move back into positive growth.


Looking forward the fourth quarter is still expected to see growth and expectations have risen in the last week. Estimates gained 0.3% to hit 5.9%, a 2.5 month high. If, and this is a big if, forward outlook continues to rise we will have entered a period of positive earnings growth with the tailwind of rising expectations. Full year 2016 outlook has risen to -0.1% and may soon turn positive. Full year 2017 outlook remains robust at 12.9% but has fallen by 0.1% once again.


The Dollar Index

The dollar is gaining strength on firming Fed rate hike outlook. There is still a low chance of rate hike this year but if data firms this month and next that chance could easily turn into a certainty. At this time the CME Fed Watch Tool shows only a 10% chance at the November meeting but a whopping 70% chance of at least a 25 bps increase by December. This week the FOMC Minutes and PPI data are the two events to watch. The Dollar Index gained about 0.5% today, confirming its break-out from the wedge pattern, but remains range bound longer term. Upside resistance is the top of the range near $97.50. A break above this level would be bullish and take the index up to 8 month highs.


The Oil Index

Oil prices are rising on hot air blowing out of OPEC. The cartel and its deal, dubiously supported by Russia, caps production at levels above those that contributed to the current oversupply situation and does nothing to alter the supply/demand imbalance. The conspiracy theorist in me has little doubt Russia and OPEC are somehow colluding to inflate prices. Regardless, prices are high and supported by talk so be careful. WTI gained more than 3% today to trade at the highest level since early July. On a technical note, today's WTI price action created an outside-day at the top of an uptrend and at/near resistance levels.

The Oil Index gained more than 1.5% today and may be breaking out of its range. The caveat is that the extreme top of the range dates back to late May, just before oil prices topped out, and is still above current price action. This level is near 1,190 and would need to be broken to get truly bullish on the sector. The indicators are bullish and moving higher but remain consistent with range bound trading. If oil prices are not able to sustain their rise neither will this sector.


The Gold Index

Gold prices rebound from long term low levels despite a rising dollar. Spot gold gained as much as 1% intraday to trade above $1,265 but remains well below previous support levels above $1,300. This move is likely a dead-cat bounce in light of the dollar's gains and move toward the top of its range. This week is likely to see more volatility regardless of direction simply because of the FOMC minutes, and possibly because of the PPI. Support target is $1,250, a break below here could go as low as $1,200.

The gold miners held steady in today's session, the miners ETF GDX gaining about 0.75% and creating a small doji spinning top. The ETF is in consolidation following last week's massive plunge and looks like it will at least test support in the near term. Support appears to be near the $22.50 level, just above the 50% retracement line I drew last week. The indicators are both bearish with stochastic crossing the lower signal line, indicative of lower prices, but MACD is already showing a peak and the peak is divergent from the new low so support at this level may hold. If broken a move down to $19.75 is likely.


In The News, Story Stocks and Earnings

No earnings to speak of but lots of business gossip making the rounds. The first bit was a tweet from Elon Musk, using his favorite method of investor communication, giving updates and teasers for Tesla. His message over the weekend said that the company would not need to raise more capital to make the Solar City purchase and that there was a new product coming from Tesla. In other news a coal mining big wig called Tesla a fraud during a televised interview. Shares of the stock were lifted by the first news, unaffected by the second, to trade just above $200.


Shares of Twitter fell hard today despite Elon Musk's use of the platform. Bidders for the company see to be drying up and that has left the market wondering what I always have, what's Twitter really for and why do I want to waste my time on it? Today's plunge shaved -13% off the stocks price leaving trading at a 2 month low. In the last 2 weeks shares of the stock have risen 35% and fallen 32%, a little bit of volatility I would say.


The VIX fell today but after opening with a small gain. By end of day the index was down about -0.52% but flat over the last 2 weeks. Even though volatility has settled back down it has done so above the previous low levels and looks like it might stick with us for a little while. The indicators are consistent with support at this level and have a bit of bullish bias. Another anything that scares the market could see this index spike back above 15 and hit 20 or 25 with a quickness.


The Indices

The market tried to rally today but couldn't get the indices out of the starting gates. Early gains of 1% (SPX) turned out to be the intraday highs, closing gains were closer to half that. Today's leader was the Dow Jones Transportation Average which made a nice attempt at breaking out of its trading range. The transports gained close to 1% in a move up to test resistance at 8,135 and the top of the now almost 8 month trading range. The indicators are consistent with resistance and the top of a range, both rolling over to form peaks although stochastic is showing a little strength by crossing the upper signal line. A break to new short term highs would be bullish but additional resistance is present just above.


The NASDAQ Composite made the 2nd biggest gain today, about 0.80%, and came within a point of hitting the current all time high. The index created a small bodied candle, an indecisive spinning top, and does not appear ready to break to new highs just yet. Price action is tentative and the indicatos continue to weaken so the chances of a surprise sell-off remain. Support is near the short term moving average and the 5,250 level, a break below here would be bearish in the near term at least and could go as low 5088 before finding support.


The S&P 500 and Dow Jones Industrial Average closed with nearly the same gain, about 0.5%, although the blue chips edged the broad market out of 3rd spot by a nose. The blue chips created a very small candle but one that moved up from the short term moving average and above the 18,250 support/resistance line. The bias has turned to the upside with this one but trading remains range bound, today's action is just above the mid point of the range. Prices may move up to test resistance at 18,500 but no break out is indicated at this time. Both indicators are weak, hovering at levels consistent with directionless trading, with no signs of strength or underlying momentum.


The S&P 500 closed with a gain near 0.45%, creating a small white bodied candle just above the short term moving average. The index remains range bound and is trading near the mid point of that range with indicators giving no sign of underlying direction. Near term support appears to be near 2,150, a break below that could go to 2,120 or 2,100. Resistance is near the current all time high, a break above that could go up indefinitely.


The market remains range bound, wound up and waiting. Waiting for earnings season, waiting on the election and waiting on the FOMC. The fundamentals are in place for a nice long rally, perhaps following a small correction, all we need is the green light to do so. This could be in the form of positive earnings outlook, a resolution to political uncertainty and a reduction of FOMC fears. One of those issues may get alleviated this week, more likely over the next few weeks, perhaps the other two will come into line as well. Until then I remain cautious in the near term, wary of correction, waiting and looking for my next great long term bullish entry.

Until then, remember the trend!

Thomas Hughes